One key concept in targeting robust out-performance is to use persistent and well-documented market anomalies as a starting point. A set of trading rules (or system) is then built around that anomaly. Some key research papers are listed below.
The presence of momentum in worldwide markets has been extensively documented:
Risk Premia Harvesting Through Dual Momentum, Gary Antonacci
Momentum is the premier market anomaly. It is nearly universal in its applicability. This paper examines cross-asset momentum with respect to what can make it most effective for momentum investors. We explore price volatility as a value-adding factor. We show that both absolute and relative momentum can enhance returns, but that absolute momentum does far more to lessen volatility and drawdown. We see that combining absolute and relative momentum gives the best results. Finally, we show how asset modules can serve as diversification building blocks that allow us to easily combine relative with absolute momentum and capture risk premia profits.
Time Series Momentum, Moskowitz
We document significant “time series momentum” in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers.
Profitability of Momentum Strategies, Jegadeesh, Titman
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993).The evidence indicates that momentum profits have continued in the 1990′s suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-holding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.
Various momentum measures may be used to select funds from the universe:
- Annual rate of price change (52 weeks), ROC52
- Two month momentum (42 days), TI42 (from Worden database)
- Move from annual low, C / Low(C,52), where C is current price close.
Results of momentum combined with other data will be shown in later posts.